Reliability concerns fuelling two-speed space market

The space insurance market is tough, with fierce competition and a run of losses in 2013 and 2014. The sector was shaken by two high profile losses in October following the failure of an Antares 130 rocket and the loss of Virgin Galactic’s SpaceShip II, a reminder that supporting the burgeoning commercial space sector is likely to be a bumpy ride. On 28 October an Orbital Sciences Antares 130 rocket carrying an Orb-3 cargo craft to the International Space Station (ISS) came to a fiery end just seconds after lift-off. It generated a $48m insurance claim. Just days later, the Virgin Galactic SpaceShip II crashed during a test flight over the Mojave Desert killing one of its two pilots. The space plane was reportedly insured for $40 to $50m, underwritten by aviation insurers led by AIG. The two losses in October will not in themselves turn the soft space insurance market, but they do come at a challenging time for space underwriters.hide“For most clients this is a good time to buy space insurance, but it’s a challenging time to be an underwriter of space risk,” according to Peter Elson, Chief Operating Officer Aerospace at JLT Specialty Ltd. “There’s plenty of competition putting pricing under pressure, while space underwriters are now having to manage a much more volatile and fragmented book of business than they did over the last 10 years,” he said. Underwriting margins are already thin for space insurers that will find it difficult to turn in a profit this year, explained Jan Schmidt, a space underwriter at Swiss Re in Zurich. Rates for launch plus one year [in-orbit] are around half of what they were in 2010, he said. The 2013 underwriting year produced a loss. 2014 has already seen above average losses and lower premiums. Total space market premium in 2014 currently stands at around $750m, compared with an average of $1bn. However, claims so far this year total about $650m, suggesting a breakeven year for space insurers, or even a small profit. Despite low rates and increased losses, the space insurance market remains attractive for insurers because it provides potential profits and a source of premium from uncorrelated risks. “Many in the market believe that rates are not sustainable at this level, but it remains a question of supply and demand,” said Mr Schmidt. “The market remains attractive even though many players are not making money,” he said, noting that there have not been any significant withdrawals from the market. While launch failures are both spectacular and costly, underwriters have also suffered some expensive claims for satellites in orbit, pointed out Mr Schmidt. This year has seen four O3b Networks telecommunications satellites suffer a power anomaly and the malfunction of the recently launched ABS-2 broadcast satellite, which has reportedly resulted in a $214m insurance claim. According to Mr Elson, space insurers have enjoyed a good run of satellite and launch reliability as well as strong profits over most of the past decade. However, in the last two years there has been an increase in insured losses. This escalation is the result of setbacks in new satellite and rocket configurations combining with continued random failures of proven systems. “We now face the real prospect of a relatively small number of partial losses wiping out the annual premium for the entire space insurance market. For the in-orbit insurance segment, that number could be just one,” said Mr Elson. As a result, space underwriters are becoming much more selective to avoid losses in a softer market. “We’re seeing far higher differentiation for launch plus one year cover, with the less well-perceived risks priced as much as three times more than the most attractive,” said Mr Elson. Recent losses are helping stabilise an otherwise soft space insurance market, according to Denis Bensoussan, Space Underwriter at Beazley. Launch vehicles or satellites that have experienced failures in recent years have seen significant rate increases, he said. “This is a market with two faces. Reliable risks attract competition, and for good risks the market remains soft. But a significant and growing section of the market containing challenging risks is attracting higher rates,” according to Mr Bensoussan. “It is only fair that underwriters reward operators that favour reliability over costs,” said Mr Bensoussan. “Technical differentiation is part of the value insurers bring. It is our responsibility as underwriters to provide premium that adequately reflects the risks and rewards those demonstrating long-term reliability,” he said. However, more expensive insurance can have a big impact on the cost of satellite procurement and launch, with insurance on average accounting for one third of the total amount. Balancing cost and reliability presents some interesting challenges for space operators. While new commercial launch vehicles from Orbital Sciences Corporation and SpaceX have increased choice since NASA’s Space Shuttle was taken out of service in 2011, there remains only limited reliable launch capacity. Ariane, the leading commercial launch provider, and SpaceX, its emerging competitor, can only supply a limited number of launches each year, while US rules on exporting satellite technology prevent operators using the Chinese Long March launch vehicle. The cheaper Russian Proton vehicle, subject to both launch failures and delays in recent years, is proving a risky choice. Following six launch failures in almost four years, Proton-M rocket launches have already seen significant rate increases. Just over ten years ago, the market perceived broadly consistent risk profiles across the main launch vehicles and satellite systems but considerable differences have emerged in the past few years, according to Mr Elson. “Not so long ago, clients could look at their total mission costs and view insurance as a significant, yet reasonably consistent element. But today there are huge differences in risk pricing,” said Mr Elson. With only about twenty launches each year requiring insurance, these conditions are also making it increasingly difficult for underwriters to build a diverse and balanced portfolio, Mr Elson explained. Higher value western-built satellites gravitate to the more reliable launch vehicles—like the Ariane 5—which attract the most competition from underwriters. However, the Ariane 5 is capable of carrying two high-value satellites into orbit, with a combined insured value roughly equal to that of a whole year’s premium for the space market. “The space market is inherently volatile with relatively few events. This is now being compounded by the challenge for underwriters to secure the lines they want across what is already a very narrow spread of risk,” said Mr Elson. The space market is not growing currently, but there are some favourable trends. For example, the development of smaller and cheaper micro-satellites coupled with more efficient and reusable space vehicles could entice new players into the satellite market, predicts Mr Schmidt, who noted that commercial operators are more likely to buy insurance than government-funded ventures. The development of the commercial space sector was aided by NASA’s decision not to replace the ageing Space Shuttle in 2011. Rather than develop a new launch vehicle, NASA awarded contracts to commercial operators Orbital Sciences Corporation and SpaceX to resupply the International Space Station, with the intention of using commercial operators to ferry cargo and astronauts to the station in the future. In addition to SpaceX and Orbital, several private companies, including Blue Origin, Virgin Galactic and UK-based Reaction Engines Ltd, are also looking to build commercial reusable launchers capable of taking people and payloads into space, albeit low orbit. The development of the commercial space sector is a positive for both satellite operators and insurers, although underwriters could potentially face higher claims as new launch vehicles mature, explained Mr Schmidt. An increasing number of reliable commercial launch vehicles will give satellite operators more choice and will help diversify risk, he said. For example, if a problem arises on one launch vehicle, there would be a greater number of alternatives available, he added. However, while the diversification of launch supply is important for operators and insurers, it only helps if they are reliable. With the market’s annual premium currently riding on just two main launch vehicles, uncertainty creates even more unpredictability in an already volatile market, explained Mr Bensoussan. “Recent losses are a sad reminder that space is a tough and unforgiving business. Insurance traditionally plays a critical enabling and supporting role to help new players get into the commercial space business, but underwriters will have to be cautious and patient by only rewarding enduring maturity and reliability and not be blind to the risks,” said Mr Bensoussan.

Reliability concerns fuelling two-speed space market

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